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Public employee unions’ effort to derail the government pension reform movement in California advanced this week when the California Supreme Court consented on November 22 to review an August First District Court of Appeal ruling that authorized state and local governments’ reduction of government retirees’ pensions.
Three months ago, a three-judge panel of the First District Court of Appeal in San Francisco ruled that state and local government employees are not necessarily entitled to pensions upon retirement that match the exact terms provided to what current or past government retirees were being provided at the time of their hiring. That ruling held that government pensions are not “immutable” and can be reduced.
The court of appeal’s August ruling amounted to a major change in California public pension law, legal and labor law experts maintain.
Historically, what has become known as the “California rule,” which is based on a series of state court decisions, the primary one having been handed down in 1955, has been the controlling factor holding what many consider to be overly-generous retirement benefits provided to public employees in place.
In the 1955 case of Allen v. City of Long Beach, the California Supreme Court said, essentially, that the pension benefits agreed to between governmental entities and the unions for governmental employees are permanently locked in.
“To be sustained as reasonable, alterations of employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages,” the state Supreme Court said in Allen v. City of Long Beach.
Over the years, government employees continued to enjoy retirement benefits that were substantially better than those offered through most private sector employers. The so-called California Rule was strengthened
in public employees’ favor with a series of further court rulings, in particular one in the 1983 state Supreme Court decision Allen v. Board of Administration. In Allen v. Board of Administration, the phraseology in the Allen v. City of Long Beach decision was changed from “should” have a comparable new advantage to “must.”
In the intervening years, however, dwindling financial resources for governmental operations have become acute, in part because of the burgeoning cost of providing pensions to governmental employees, who are living longer and longer, while remaining until death eligible to pull yearly pensions that approach or exceed the annual pay or salaries they received while working. In this way, many cities in California, including a majority of the 24 cities in San Bernardino County, have a future debt burden, referred to as “an unfunded pension liability,” exceeding $50 million and in some cases approaching $100 million in those individual municipalities. The California Public Employees Retirement System, known by its acronym CalPERs, is the entity that oversees a large share of the provision of public pensions in California by taking in participant and governmental contributions to the system and handling investments. To maintain its integrity, CalPERS says it must achieve a 7.5 percent return annually on its investments, a goal it has consistently missed over the last several years. CalPERS now has a future shortfall or “unfunded liability” of $139 billion. This has resulted in governmental entities up and down the state – including cities, counties and the state government – having to make up the differences. Because of this, money that was previously available for ongoing governmental operations has been reduced, entailing a drop in the availability of normal and standard governmental services currently and anticipated into the future. An effort to offset this has been ongoing by reforming the public pension system.
A significant case in that reform movement is one involving the effort by Marin County to end what is referred to as “pension spiking,” the practice of public employees counting their benefits – vacation, sick pay, medical coverage, etc. – as part of their salaries in the calculation to set their annual pensions.
In 2012, Marin County employee unions filed suit, contending their vested rights were violated by a pension reform enacted in 2012 that prevents pension boosts from unused vacation and leave, bonuses, terminal pay and other things. Those “anti-spiking” provisions apply to current workers from January 1, 2013 going forward and all new hires brought in after that date.
In August, a three-member panel of the First District Court of Appeal in San Francisco, consisting of Justices James Richman J. Anthony Kline and Maria Miller, concluded that Marin County, and by extension other governmental entities in California could reduce future pensions and eliminate spiking provisions.
Pension spiking has occurred when some workers cash in years of accumulated vacation or sick pay or pay for added duties they volunteered for, thus inflating their pay during the period on which their retirement stipend is based — usually the final year or years of their employment. In certain cases this has given retirees pensions that exceeded their regular salary. The Marin County retirement system, relying on the new law, decided it would no longer base pensions on the addition of various on-call duties and for waiving health insurance. The unions contested that move in court. They maintained employees had set their hearts on getting the increased pension benefits and in some cases agreed to go to work in the public sector because of the expectation of the fatter pensions.
In saying that Marin County was justified in not allowing the pension spiking to occur, Justices Richman, Kline and Miller referenced one of the few court cases in the past half century that cast a shadow over the California rule, Miller v. State of California, which said, “the governing body may make reasonable modifications and changes before the pension becomes payable and that until that time the employee does not have a right to any fixed or definite benefits but only to a substantial or reasonable pension.”
In their ruling, Richman, Kline and Miller stated, “Sort of actual abolition, a radical reduction of benefits, or a fiscally unjustifiable increase in employee contributions, the guiding principle is still the one identified by Miller in 1977.”
Justice Richman, who wrote the decision for First District Court of Appeal wrote that “while a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension — not an immutable entitlement to the most optimal formula of calculating the pension. And the Legislature may, prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension. So long as the Legislature’s modifications do not deprive the employee of a ‘reasonable’ pension, there is no constitutional violation.”
If it stands, that ruling could be the means by which the massive unfunded liabilities facing cities, counties and the state could be significantly reduced along with the scale of the public pensions. But the union representing Marin County’s employees have challenged the ruling and on November 22 the California Supreme Court, which could have declined to consider the matter, unanimously consented to hearing labor unions’ appeal of the First District Court of Appeal’s ruling. The court will not take up the matter until another panel of the 1st District Court of Appeal resolves another pending pension dispute.